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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number: 1-35229
Xylem Inc.
(Exact name of registrant as specified in its charter)
 
Indiana  45-2080495
(State or other jurisdiction of incorporation or
organization)
  (I.R.S. Employer Identification No.)
1 International Drive, Rye Brook, NY 10573
(Address of principal executive offices) (Zip code)
(914) 323-5700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange of which registered
Common Stock, par value $0.01 per shareXYLNew York Stock Exchange
2.250% Senior Notes due 2023XYL23New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes    No  
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  
As of May 1, 2020, there were 179,915,293 outstanding shares of the registrant’s common stock, par value $0.01 per share.




Xylem Inc.
Table of Contents
ITEM
  
  
PAGE
PART I – Financial Information
Item 1-
Item 2-
Item 3-
Item 4-
PART II – Other Information
Item 1-
Item 1A-
Item 2-
Item 3-
Item 4-
Item 5-
Item 6-
2


PART I

ITEM 1.             CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
(in millions, except per share data)

For the three months ended March 31,20202019
Revenue$1,123  $1,237  
Cost of revenue714  763  
Gross profit409  474  
Selling, general and administrative expenses297  303  
Research and development expenses49  51  
Restructuring and asset impairment charges2  11  
Operating income61  109  
Interest expense16  18  
Other non-operating (expense) income, net(3) 2  
Gain from sale of business  1  
Income before taxes42  94  
Income tax expense4  15  
Net income$38  $79  
Earnings per share:
Basic$0.21  $0.44  
Diluted$0.21  $0.43  
Weighted average number of shares:
Basic180.2  179.7  
Diluted181.3  181.1  
See accompanying notes to condensed consolidated financial statements.

3


XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)
(in millions)
 
For the three months ended March 31,20202019
Net income$38  $79  
Other comprehensive (loss) income, before tax:
Foreign currency translation adjustment(78) 29  
Net change in derivative hedge agreements:
Unrealized loss(2) (9) 
Amount of loss reclassified into net income3  2  
Net change in postretirement benefit plans:
Amortization of prior service credit(1) (1) 
Amortization of net actuarial loss into net income5  3  
Other comprehensive (loss) income, before tax(73) 24  
Income tax expense related to items of other comprehensive (loss) income14  4  
Other comprehensive (loss) income, net of tax(87) 20  
Comprehensive (loss) income$(49) $99  
Less: comprehensive loss attributable to noncontrolling interests(1)   
Comprehensive (loss) income attributable to Xylem $(48) $99  
See accompanying notes to condensed consolidated financial statements.
4


XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except per share amounts)
 
March 31,
2020
December 31,
2019
  
ASSETS
Current assets:
Cash and cash equivalents$739  $724  
Receivables, less allowances for discounts, returns and doubtful accounts of $29 and $35 in 2020 and 2019, respectively975  1,036  
Inventories573  539  
Prepaid and other current assets175  151  
Total current assets2,462  2,450  
Property, plant and equipment, net628  658  
Goodwill2,790  2,839  
Other intangible assets, net1,141  1,174  
Other non-current assets570  589  
Total assets$7,591  $7,710  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$506  $597  
Accrued and other current liabilities619  628  
Short-term borrowings and current maturities of long-term debt459  276  
Total current liabilities1,584  1,501  
Long-term debt2,031  2,040  
Accrued postretirement benefits433  445  
Deferred income tax liabilities315  310  
Other non-current accrued liabilities407  447  
Total liabilities4,770  4,743  
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 194.4 shares and 193.9 shares in 2020 and 2019, respectively2  2  
Capital in excess of par value2,004  1,991  
Retained earnings1,854  1,866  
Treasury stock – at cost 14.5 shares and 13.7 shares in 2020 and 2019, respectively(587) (527) 
Accumulated other comprehensive loss(461) (375) 
Total stockholders’ equity2,812  2,957  
Non-controlling interests9  10  
Total equity2,821  2,967  
Total liabilities and stockholders’ equity$7,591  $7,710  

See accompanying notes to condensed consolidated financial statements.
5


XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
For the three months ended March 31,20202019
Operating Activities
Net income$38  $79  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation29  29  
Amortization35  35  
Share-based compensation8  9  
Restructuring and asset impairment charges2  11  
Gain from sale of business  (1) 
Other, net4  1  
Payments for restructuring(8) (4) 
Changes in assets and liabilities (net of acquisitions):
Changes in receivables23  7  
Changes in inventories(54) (25) 
Changes in accounts payable(68) (17) 
Other, net(11) (41) 
Net Cash – Operating activities(2) 83  
Investing Activities
Capital expenditures(51) (69) 
Acquisitions of businesses, net of cash acquired   (5) 
Other, net3  (3) 
Net Cash – Investing activities(48) (77) 
Financing Activities
Short-term debt issued, net193  50  
  Short-term debt repaid(3)   
Repurchase of common stock(60) (39) 
Proceeds from exercise of employee stock options5  4  
Dividends paid(48) (44) 
Net Cash – Financing activities87  (29) 
Effect of exchange rate changes on cash(22) 2  
Net change in cash and cash equivalents15  (21) 
Cash and cash equivalents at beginning of year724  296  
Cash and cash equivalents at end of period$739  $275  
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest$12  $13  
Income taxes (net of refunds received)$8  $18  
See accompanying notes to condensed consolidated financial statements.
6


XYLEM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Background and Basis of Presentation
Background
Xylem Inc. (“Xylem” or the “Company”) is a leading equipment and service provider for water and wastewater applications with a broad portfolio of products and services addressing the full cycle of water, from collection, distribution and use to the return of water to the environment.
Xylem operates in three segments, Water Infrastructure, Applied Water and Measurement & Control Solutions. See Note 19, "Segment Information", to the condensed consolidated financial statements for further segment background information.
Except as otherwise indicated or unless the context otherwise requires, "Xylem," "we," "us," "our" and the "Company" refer to Xylem Inc. and its subsidiaries.
Basis of Presentation
The interim condensed consolidated financial statements reflect our financial position and results of operations in conformity with accounting principles generally accepted in the United States of America ("GAAP"). All intercompany transactions between our businesses have been eliminated.
The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) considered necessary for a fair statement of the financial position and results of operations for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. We consistently applied the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2019 ("2019 Annual Report") in preparing these unaudited condensed consolidated financial statements, with the exception of accounting standard updates described in Note 2. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes included in our 2019 Annual Report.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Estimates are revised as additional information becomes available. Estimates and assumptions are used for, but not limited to, postretirement obligations and assets, revenue recognition, income tax contingency accruals and valuation allowances, goodwill and indefinite lived intangible impairment testing, contingent liabilities and lease accounting. Actual results could differ from these estimates.
Our quarterly financial periods end on the Saturday closest to the last day of the calendar quarter, except for the fourth quarter which ends on December 31. For ease of presentation, the condensed consolidated financial statements included herein are described as ending on the last day of the calendar quarter.

Note 2. Recently Issued Accounting Pronouncements
Recently Adopted Pronouncements
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," amending the accounting for the impairment of financial instruments, including trade receivables. Under previous guidance, credit losses were recognized when the applicable losses had a probable likelihood of occurring and this assessment was based on past events and current conditions. The amended current guidance eliminates the “probable” threshold and requires an entity to use a broader range of information, including forecast information when estimating expected credit losses. Generally, this should result in a more timely recognition of credit losses. This guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted for interim and annual periods beginning after December 15, 2018. The requirements of the amended guidance should be applied using a modified retrospective approach
7


except for debt securities, which require a prospective transition approach. We adopted this guidance as of January 1, 2020. The adoption of this guidance did not have a material impact on our financial condition and results of operations.

Note 3. Acquisitions and Divestitures
Acquisitions
During the three months ended March 31, 2020 and 2019 we spent approximately $0 million and $5 million, net of cash received on acquisition activity, respectively.

Note 4. Revenue
Disaggregation of Revenue
The following table illustrates the sources of revenue:
Three Months Ended
March 31,
(in millions)20202019
Revenue from contracts with customers$1,074  $1,178  
Lease Revenue49  59  
Total$1,123  $1,237  

The following table reflects revenue from contracts with customers by application:
Three Months Ended
March 31,
(in millions)20202019
Water Infrastructure
     Transport$318  $346  
     Treatment71  77  
Applied Water
     Building Services187  213  
     Industrial Water151  166  
Measurement & Control Solutions
     Water183  199  
     Energy72  73  
     Software as a Service21  24  
     Test71  80  
Total$1,074  $1,178  
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The following table reflects revenue from contracts with customers by geographical region:
Three Months Ended
March 31,
(in millions)20202019
Water Infrastructure
     United States$121  $133  
     Europe157  160  
Asia Pacific59  74  
Other52  56  
Applied Water
     United States191  201  
     Europe82  94  
Asia Pacific24  39  
Other41  45  
Measurement & Control Solutions
     United States221  236  
     Europe74  72  
Asia Pacific22  31  
Other30  37  
Total$1,074  $1,178  
Contract Balances

We receive payments from customers based on a billing schedule as established in our contracts. Contract assets relate to costs incurred to perform in advance of scheduled billings. Contract liabilities relate to payments received in advance of performance under the contracts. Changes in contract assets and liabilities are due to our performance under the contract.
The table below provides contract assets, contract liabilities, and significant changes in contract assets and liabilities:
(in millions)Contract Assets (a)Contract Liabilities
Balance at January 1, 2019$96  $113  
  Additions, net39  46  
  Revenue recognized from opening balance—  (45) 
  Billings(32) —  
  Other11  2  
Balance at March 31, 2019$114  $116  
Balance at January 1, 2020$106  $135  
  Additions, net42  54  
  Revenue recognized from opening balance—  (47) 
  Billings(38) —  
  Other(4) (4) 
Balance at March 31, 2020$106  $138  
(a)Excludes receivable balances which are disclosed on the balance sheet
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Performance obligations
Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycles and delays can occur from time to time. As of March 31, 2020, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied for contracts with performance obligations, amount to $380 million. We expect to recognize the majority of revenue upon the completion of satisfying these performance obligations in the following 60 months. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose original expected duration is less than one year.

Note 5. Restructuring and Asset Impairment Charges
Restructuring
From time to time, the Company will incur costs related to restructuring actions in order to optimize our cost base and more strategically position ourselves. During the three months ended March 31, 2020, we recognized restructuring charges of $2 million. We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount within our Water Infrastructure segment.
During the three months ended March 31, 2019, we recognized restructuring charges of $8 million. We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount and consolidation of facilities within our Measurement & Control Solutions and Water Infrastructure segments, as well as headcount reductions within our Applied Water segment.
The following table presents the components of restructuring expense and asset impairment charges:
Three Months Ended
March 31,
(in millions)20202019
By component:
Severance and other charges$2  $7  
Lease related charges  1  
Total restructuring charges$2  $8  
Asset impairment  3  
Total restructuring and asset impairment charges$2  $11  
By segment:
Water Infrastructure$2  $4  
Applied Water    
Measurement & Control Solutions  7  
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The following table displays a roll-forward of the restructuring accruals, presented on our Condensed Consolidated Balance Sheets within "accrued and other current liabilities" and "other non-current accrued liabilities", for the three months ended March 31, 2020 and 2019:
(in millions)20202019
Restructuring accruals - January 1$27  $5  
Restructuring charges2  8  
Cash payments(8) (4) 
Foreign currency and other(1)   
Restructuring accruals - March 31$20  $9  
By segment:
Water Infrastructure$1  $2  
Applied Water1    
Measurement & Control Solutions17  4  
Regional selling locations (a)1  3  
(a)Regional selling locations consist primarily of selling and marketing organizations and related support services that incurred restructuring expense which was allocated to the segments. The liabilities associated with restructuring expense were not allocated to the segments.


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The following table presents expected restructuring spend for actions commenced as of March 31, 2020:
(in millions)Water InfrastructureApplied WaterMeasurement & Control SolutionsTotal
Actions Commenced in 2020:
Total expected costs$1  $  $  $1  
Costs incurred during Q1 20201      1  
Total expected costs remaining$  $  $  $  
Actions Commenced in 2019:
Total expected costs$20  $5  $27  $52  
Costs incurred during 201918  5  27  50  
Costs incurred during Q1 20201      1  
Total expected costs remaining$1  $  $  $1  
Actions Commenced in 2017:
Total expected costs$12  $7  $4  $23  
Costs incurred during 20175  4  2  11  
Costs incurred during 20182  1  1  4  
Costs incurred during 20191    1  2  
Costs incurred during Q1 2020        
Total expected costs remaining$4  $2  $  $6  
The Water Infrastructure actions commenced in 2020 consist primarily of severance charges and are substantially complete. The Water Infrastructure, Applied Water, and Measurement & Control Solutions actions commenced in 2019 consist primarily of severance charges. The Applied Water and Measurement & Control Solutions actions are complete and the Water Infrastructure actions are expected to continue through the fourth quarter of 2020. The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 2017 consist primarily of severance charges. The Measurement & Control Solutions actions are complete and the Water Infrastructure and Applied Water actions are expected to continue through 2021.
Asset Impairment
During the first quarter of 2019 we determined that certain assets within our Measurement & Control Solutions segment, including a customer relationship, were impaired. Accordingly we recognized an impairment charge of $3 million. Refer to Note 9, "Goodwill and Other Intangible Assets," for additional information.

Note 6. Income Taxes
Our quarterly provision for income taxes is measured using an estimated annual effective tax rate, adjusted for discrete items within periods presented. The comparison of our effective tax rate between periods is significantly impacted by the level and mix of earnings and losses by tax jurisdiction and discrete items.
The income tax provision for the three months ended March 31, 2020 was $4 million resulting in an effective tax rate of 10.0%, compared to a $15 million charge resulting in an effective tax rate of 16.6% for the same period in 2019. The effective tax rate for the three month period ended March 31, 2020 differs from the United States federal statutory rate primarily due to the mix of earnings in jurisdictions, partially offset by the Global Intangible Low-Taxed Income ("GILTI") inclusion. Additionally, the effective tax rate for the three month period ended March 31, 2020 is lower than the same period in 2019 due to the relative impact of the benefit from favorable equity compensation deductions on the effective tax rate.
Unrecognized Tax Benefits
We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities or litigation, based on the technical merits of the position. The
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tax benefits recognized in the condensed consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits at March 31, 2020 was $128 million, as compared to $129 million at December 31, 2019, which if ultimately recognized will reduce our effective tax rate. We believe that it is reasonably possible that the unrecognized tax benefits will be reduced by approximately $4 million within the next 12 months as a result of the expiration of certain statutes of limitations. We classify interest expense relating to unrecognized tax benefits as a component of other non-operating expense, net, and tax penalties as a component of income tax expense in our Condensed Consolidated Income Statements. As of March 31, 2020, we had $9 million of interest accrued for unrecognized tax benefits.

During 2019, Xylem’s Swedish subsidiary received a tax assessment for the 2013 tax year related to the tax treatment of an intercompany transfer of certain intellectual property that was made in connection with a reorganization of our European businesses. The assessment asserts an aggregate amount of approximately $80 million for tax, penalties and interest. Xylem filed an appeal with the Administrative Court of Stockholm. Management, in consultation with external legal advisors, believes it is more likely than not that Xylem will prevail on the proposed assessment and is vigorously defending our position through litigation. As of March 31, 2020, we have not recorded any unrecognized tax benefits related to this uncertain tax position.

Note 7. Earnings Per Share
The following is a reconciliation of the shares used in calculating basic and diluted net earnings per share:
Three Months Ended
 March 31,
20202019
Net income (in millions)$38  $79  
Shares (in thousands):
Weighted average common shares outstanding180,154  179,720  
Add: Participating securities (a)25  26  
Weighted average common shares outstanding — Basic180,179  179,746  
Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options725  835  
Dilutive effect of restricted stock units and performance share units390  532  
Weighted average common shares outstanding — Diluted181,294  181,113  
Basic earnings per share$0.21  $0.44  
Diluted earnings per share$0.21  $0.43  
(a)Restricted stock unit awards containing rights to non-forfeitable dividends that participate in undistributed earnings with common shareholders are considered participating securities for purposes of computing earnings per share.
(b)Incremental shares from stock options, restricted stock units and performance share units are computed by the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock units and performance share units, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards. Performance share units will be included in the treasury stock calculation of diluted earnings per share upon achievement of underlying performance or market conditions at the end of the reporting period. See Note 15, "Share-Based Compensation Plans", to the condensed consolidated financial statements for further detail on the performance share units.
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Three Months Ended
 March 31,
(in thousands)20202019
Stock options1,367  1,394  
Restricted stock units314  348  
Performance share units285  472  

Note 8. Inventories
The components of total inventories are summarized as follows: 
(in millions)March 31,
2020
December 31,
2019
Finished goods$228  $212  
Work in process51  47  
Raw materials294  280  
Total inventories$573  $539  

Note 9. Goodwill and Other Intangible Assets
Goodwill 
Changes in the carrying value of goodwill by reportable segment for the three months ended March 31, 2020 are as follows:
(in millions)
Water
Infrastructure
Applied WaterMeasurement & Control SolutionsTotal
Balance as of January 1, 2020$651  $513  $1,675  $2,839  
Activity in 2020
Foreign currency and other(13) (5) (31) (49) 
Balance as of March 31, 2020$638  $508  $1,644  $2,790  

Other Intangible Assets
Information regarding our other intangible assets is as follows:
March 31, 2020December 31, 2019
(in millions)
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Customer and distributor relationships$931  $(361) $570  $945  $(352) $593  
Proprietary technology and patents200  (113) 87  204  (111) 93  
Trademarks145  (54) 91  148  (52) 96  
Software442  (215) 227  428  (206) 222  
Other17  (16) 1  20  (16) 4  
Indefinite-lived intangibles165    165  166    166  
Other Intangibles$1,900  $(759) $1,141  $1,911  $(737) $1,174  
Amortization expense related to finite-lived intangible assets was $35 million and $35 million for the three month periods ended March 31, 2020 and 2019, respectively.
During the first quarter of 2019, we determined that the intended use of a finite-lived customer relationship within the test application of our Measurement & Control Solutions segment had changed. Accordingly we recorded a $3
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million impairment charge. The charge was calculated using the income approach and is reflected in “Restructuring and asset impairment charges” in our Condensed Consolidated Income Statements.

Note 10. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions, and we principally manage our exposures to these risks through management of our core business activities. Certain of our foreign operations expose us to fluctuations of foreign interest rates and exchange rates that may impact revenue, expenses, cash receipts, cash payments, and the value of our stockholders' equity. We enter into derivative financial instruments to protect the value or fix the amount of certain cash flows in terms of the functional currency of the business unit with that exposure and reduce the volatility in stockholders' equity.